fresno county employees retirement association, et al. v....

1

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ──────────────────────────────────── FRESNO COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ET AL., individually and on behalf of all others similarly situated, Plaintiffs, - against – COMSCORE, INC. ET AL, Defendants. ────────────────────────────────────

16-cv-01820 (JGK) OPINION AND ORDER

JOHN G. KOELTL, District Judge: This is a consolidated securities fraud action. The

defendants are (1) comScore, Inc. (“comScore”) and several of

its current and former officers and directors, specifically,

Kenneth J. Tarpey, Melvin Wesley III, Serge Matta, Magid M.

Abraham, William J. Henderson, Russell Fradin, Gian Fulgoni,

William Katz, Ronald J. Korn, and Joan Lewis (collectively, the

“comScore defendants”); and (2) the Rentrak Corporation, a

subsidiary of comScore (“Rentrak”), and several of its former

directors, specifically, David Boylan, David I. Chemerow,

William Engel, Patricia Gottesman, William Livek, Anne

MacDonald, Martin O’Connor, Brent Rosenthal, and Ralph Shaw

(collectively, the “Rentrak defendants”) (together with the

comScore defendants, the “defendants”).

The Second Consolidated Amended Class Action Complaint (the

“SAC”) is divided into two parts and asserts two theories of

Case 1:16-cv-01820-JGK Document 228 Filed 07/28/17 of 75

2

liability. First, the Lead Plaintiffs --- the Fresno County

Employees’ Retirement Association, and the Employees’ Retirement

System of the City of Baton Rouge and Parish of East Baton Rouge

--- and individual plaintiff William Huff (“Huff”)

(collectively, the “plaintiffs”) assert claims on behalf of a

proposed class of investors in comScore who purchased securities

of comScore from February 11, 2014 through November 23, 2016

(the “Class Period”). SAC ¶ 662. In Count I, the plaintiffs

allege that comScore, Matta, Wesley, Abraham, and Tarpey

(collectively, the “10(b) defendants”) made material

misstatements in connection with comScore’s recognition of

revenue for nonmonetary barter transactions. The plaintiffs

claim that the 10(b) defendants violated Section 10(b) of the

Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C.

§ 78j(b), and Rule 10b–5, promulgated thereunder, 17 C.F.R.

§ 240.10b–5 (the “Section 10(b) claims” or “10(b) claims”). In

Count II, the plaintiffs allege control person liability against

Matta, Wesley, Abraham, and Tarpey (collectively, the

“individual 10(b) defendants”) under Section 20(a) of the

Exchange Act, 15 U.S.C. § 78t(a).

Second, the plaintiffs allege that the disclosures and

solicitations relevant to the January 29, 2016 merger (the

“Merger”) between comScore and Rentrak contained material

misstatements and omissions also in connection with comScore’s


3

recognition of revenue for nonmonetary barter transactions. In

Count III, plaintiff Huff asserts on behalf of a proposed class

of investors who held the common stock of Rentrak as of December

10, 2015, and were entitled to vote on the Merger, see SAC

¶ 662, claims pursuant to Section 14(a) of the Exchange Act, 15

U.S.C. § 79n(a), and Rule 14a-9, promulgated thereunder, 17

C.F.R. § 240.14a-9, against comScore, Matta, Wesley, Abraham,

Fulgoni, Fradin, Henderson, Katz, Korn, and Lewis (the “comScore

Merger defendants”). In Count IV, plaintiff Huff asserts a

similar claim solely against the Rentrak defendants. The

comScore Merger defendants sued in Count III and the Rentrak

defendants sued in Count IV are referred to collectively as the

“Merger defendants.” In Count V, plaintiff Huff, on behalf of a

proposed class of investors who acquired comScore’s common stock

pursuant to a registration statement filed with the United

States Securities and Exchange Commission (the “SEC”) on October

30, 2015, and subsequently amended, asserts a claim pursuant to

Section 11 of the Securities Act of 1933 (the “Securities Act”),

15 U.S.C. § 77k, against the comScore Merger defendants.

Pending before the Court are four motions pursuant to

Federal Rule of Civil Procedure 12(b)(6) to dismiss the SAC for

failure to state a claim on behalf of (1) all of the comScore

defendants collectively; (2) Wesley individually; (3) Tarpey

individually; and (4) the Rentrak defendants. This Court has


4

subject matter jurisdiction pursuant to 15 U.S.C. §§ 77v and

78aa, and 28 U.S.C. § 1331.

For the following reasons, the motions are denied.

I.

In deciding a motion to dismiss pursuant to Rule 12(b)(6)

of the Federal Rules of Civil Procedure, the allegations in the

complaint are accepted as true, and all reasonable inferences

must be drawn in the plaintiffs’ favor. McCarthy v. Dun &

Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). The Court’s

function on a motion to dismiss is “not to weigh the evidence

that might be presented at a trial but merely to determine

whether the complaint itself is legally sufficient.” Goldman v.

Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). A complaint should

not be dismissed if the plaintiffs have stated “enough facts to

state a claim to relief that is plausible on its face.” Bell

Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has

facial plausibility when the plaintiff[s] plead[] factual

content that allows the court to draw the reasonable inference

that the defendant[s] [are] liable for the misconduct alleged.”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While factual

allegations should be construed in the light most favorable to

the plaintiffs, “the tenet that a court must accept as true all

of the allegations contained in a complaint is inapplicable to

legal conclusions.” Id.


5

A claim under Section 10(b) of the Exchange Act sounds in

fraud and must meet the pleading requirements of Rule 9(b) of

the Federal Rules of Civil Procedure and of the Private

Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u–

4(b). Rule 9(b) requires that the complaint “(1) specify the

statements that the plaintiff[s] contend[] were fraudulent,

(2) identify the speaker, (3) state where and when the

statements were made, and (4) explain why the statements were

fraudulent.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d

87, 99 (2d Cir. 2007). The PSLRA similarly requires that the

complaint “specify each statement alleged to have been

misleading [and] the reason or reasons why the statement is

misleading,” and it adds the requirement that “if an allegation

regarding the statement or omission is made on information and

belief, the complaint shall state with particularity all facts

on which that belief is formed.” 15 U.S.C. § 78u–4(b)(1); ATSI,

493 F.3d at 99.

When presented with a motion to dismiss pursuant to Rule

12(b)(6), the Court may consider documents that are referenced

in the complaint, documents that the plaintiffs relied on in

bringing suit and that are either in the plaintiffs’ possession

or that the plaintiffs knew of when bringing suit, or matters of

which judicial notice may be taken. See Chambers v. Time Warner,

Inc., 282 F.3d 147, 153 (2d Cir. 2002). The Court can take


6

judicial notice of public disclosure documents that must be

filed with the SEC and documents that both “bear on the

adequacy” of SEC disclosures and are “public disclosure

documents required by law.” Kramer v. Time Warner, Inc., 937

F.2d 767, 773–74 (2d Cir. 1991); see also In re Eletrobras Sec.

Litig., No. 15-CV-5754 (JGK), 2017 WL 1157138, at *1-2 (S.D.N.Y.

Mar. 27, 2017).

II.

The following facts are undisputed or accepted as true for

purposes of the defendants’ motions to dismiss. The SAC is

divided into two parts. The first part relates to Counts I and

II, and the second part to Counts III, IV, and V. The facts

relevant to one set of Counts will not be repeated except as

necessary.

A.

The following facts are primarily relevant to Counts I and

II.

comScore is a media measurement and digital analytics

company that analyzes audience and consumer behavior, including

by assessing Internet traffic and usage. SAC ¶ 40. comScore

provides its data analysis services to its customers --- such as

marketers and advertisers --- regarding the size and

demographics of audiences and consumers. SAC ¶ 40.


7

The individual 10(b) defendants were each high-ranking

officers and directors of comScore.

Abraham is the co-founder of comScore and served as the

company’s CEO from its founding in 1999 until March 1, 2014. SAC

¶ 37. From March 1, 2014 until July 21, 2016, Abraham served as

the Executive Chairman of the Board of Directors. SAC ¶ 37.

Matta began working for comScore in 2000, and served as the

company’s President from June 2013 until August 5, 2016. SAC

¶ 35. Matta replaced Abraham as comScore’s CEO, a position he

held from March 1, 2014 until August 5, 2016. SAC ¶ 35. Matta

became a director in April 2014. See comScore Amended Form 10-K

dated Apr. 24, 2015 at 1.

Tarpey was comScore’s CFO from April 20, 2009 until August

5, 2014. SAC ¶ 38. Wesley replaced Tarpey as comScore’s CFO, a

position he held from August 29, 2014 until August 5, 2016. SAC

¶ 36.

During the Class Period, comScore entered into a series of

data sharing agreements with other companies. Pursuant to these

agreements, substantially no money changed hands; instead,

comScore and its counterparties swapped data-for-data, making

the data swaps nonmonetary “barter” transactions. SAC ¶¶ 9, 71.

The ostensible purpose of the data swaps was to give comScore

access to more data to improve its analytics products and

services. See SAC ¶¶ 83-84.


8

Under United States Generally Accepted Accounting

Principles (“GAAP”), “a nonmonetary transaction will ordinarily

have no effect on a company’s operating income [or cash flow],

because the [c]ompany will recognize matching revenue and

expense from the exchange. In other words, any revenue will be

cancelled out by the matching expense.” SAC ¶ 166. While

nonmonetary transactions should ultimately have no effect on a

company’s operating income or cash flow, they can have a

permanent impact on a company’s reported revenues and expenses.

Moreover, a company can delay recognizing expenses for

nonmonetary transactions due to “timing differences in the

delivery and receipt of the respective nonmonetary assets

exchanged.” SAC ¶ 168.

comScore recognized significant revenues on a periodic

basis during the Class Period by accounting for the nonmonetary

data assets on a fair value basis, with the amount of revenue

recognized in such transactions increasing as the Class Period

progressed. SAC ¶ 144. comScore booked tens of millions of

dollars in revenue from these nonmonetary transactions based on

the determination by the 10(b) defendants of the “fair value” of

the data exchanged. SAC ¶ 72.

comScore reported total revenues of $286.9 million for

2013, of which $3.2 million (1.12%) was attributed to

nonmonetary transactions; total revenues of $329.1 million for


9

2014, of which $16.3 million (4.95%) was attributed to

nonmonetary transactions; and total revenues of $271.1 million

for the first three quarters of 2015, of which $23.7 million

(8.74%) was attributed to nonmonetary transactions. SAC ¶ 72. In

sum, comScore recognized $43.2 million in nonmonetary revenue

during the Class Period, which accounted for a substantial

proportion (around 40.3%) of comScore’s revenue growth during

the period. SAC ¶ 73.

As comScore would later admit, “as a result of certain

instances of misconduct and errors in accounting

determinations,” the company should have recognized no revenue

from these nonmonetary transactions. Micheletto Decl., Ex. B

(comScore Form 8-K dated Nov. 23, 2016). comScore will have to

restate its financial results from end-of-year 2013 through end-

of-year 2015. SAC ¶ 17. The crux of the allegations in the SAC

is that the 10(b) defendants knew at the time that they were

misstating nonmonetary revenue in an effort to inflate

comScore’s reported revenues and revenue related metrics, such

as adjusted earnings before interest, taxes, depreciation, and

amortization (“Adjusted EBITDA”).1 See, e.g., SAC ¶ 167.

1 “Adjusted EBITDA” was not calculated in accordance with GAAP. See Hendon Decl., Ex. 1 (comScore 2013 Form 10-K at 65).


10

comScore’s disclosures during the Class Period stated that

comScore was accounting for nonmonetary revenue in compliance

with ASC 845 of GAAP:

The Company accounts for nonmonetary transactions under ASC 845, Nonmonetary Transactions. Nonmonetary transactions with commercial substance are recorded at the estimated fair value of assets surrendered including cash, if cash is less than 25% of the fair value of the overall exchange, unless the fair value of the assets received is more clearly evident, in which case the fair value of the asset received is used.

SAC ¶ 144. According to ASC 845, nonmonetary transactions

should be accounted for on a fair value basis unless any one of

three conditions applies, in which case the transaction should

be accounted for on a historical cost basis:

A nonmonetary exchange shall be measured based on the recorded amount . . . of the nonmonetary asset(s) relinquished, and not on the fair values of the exchanged assets, if any of the following conditions apply: a. The fair value of neither the asset(s) received nor

the asset(s) relinquished is determinable within reasonable limits.

b. The transaction is an exchange of a product or

property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.

c. The transaction lacks commercial substance.

SAC ¶ 147 (quoting ASC 845-10-30-3). ASC 845 defines

“commercial substance” to mean that “the entity’s future cash


11

flows are expected to significantly change as a result of the

exchange.” SAC ¶ 147 (quoting ASC 845-10-30-4).

The plaintiffs point to analyst reports and comScore’s

filings to show that the market considered revenue and Adjusted

EBITDA to be key metrics for evaluating the company’s

performance. See, e.g., SAC ¶¶ 41-45. With each earnings

announcement, at least some of the 10(b) defendants touted

comScore’s “record” revenue and Adjusted EBITDA numbers, which

were consistently ahead of expectations, and prompted comScore

to raise its revenue guidance on several occasions. See, e.g.,

SAC ¶¶ 48, 50, 52, 54, 57-61, 276, 308. Analysts reacted

bullishly to the earnings announcements, focusing on revenue and

Adjusted EBITDA. See, e.g., SAC ¶¶ 49, 51, 53, 55, 62. So too

did the market: comScore’s stock price consistently increased in

response to comScore’s earnings announcements, soaring from

approximately $30.97 per share in February 2014 to a Class

Period high of $64.64 in August 2015. SAC ¶¶ 47, 63.

The SAC alleges that the individual 10(b) defendants were

financially motivated to inflate nonmonetary revenue. In

particular, on November 7, 2014, Matta and Wesley received

grants of Restricted Stock Units (“RSUs”) that would trigger if

comScore’s stock attained predetermined price points ($48, $50,

$55, and $60 per share) during any consecutive 30-day period.

SAC ¶¶ 7, 64. At the time, comScore’s stock was trading at


12

around $43 per share. The RSUs met each successive price point

following successive earnings reports, which were bolstered by

large amounts of nonmonetary revenue. The RSUs completely vested

on August 23, 2015 on the heels of comScore’s second quarter

2015 earnings announcement. SAC ¶¶ 65-67. Matta received $7.4

million and Wesley $1.64 million in comScore shares. SAC ¶ 67.

On the investor call for that quarter, Matta and Wesley

trumpeted comScore’s second quarter 2015 revenue growth as

compared to the second quarter of 2014. SAC ¶¶ 60-61. For the

second quarter of 2015, comScore recognized $10.8 million in

nonmonetary revenue alone, which constituted 85.7% of the

revenue growth for that quarter. SAC ¶ 74.

The plaintiffs allege that the 10(b) defendants’ scheme to

inflate revenues threatened to unravel soon thereafter. On

August 31, 2015, the Wall Street Journal published an article

entitled “Is comScore’s Revenue Growth as Good as it Seems?” in

which --- as the title suggests --- the newspaper questioned

comScore’s recognition of nonmonetary revenue on a fair value

basis, noting that nonmonetary revenue was driving much of

comScore’s revenue growth. SAC ¶¶ 75-78.

On September 2, 2015, comScore’s stock price fell from

$52.21 to $44.3. SAC ¶ 79. The plaintiffs allege that the 10(b)

defendants immediately engaged in damage control to maintain

comScore’s artificially inflated stock price.


13

On September 3, 2015, the plaintiffs allege that Matta and

Wesley participated in a private conference call arranged by

SunTrust Robinson Humphrey (the “SunTrust Call”) for a limited

group of institutional investors in which Matta and Wesley

“vigorously defended” comScore’s accounting of nonmonetary

revenue. SAC ¶¶ 82-85.

Wesley explained the rationale for the barter data swaps

(as opposed to paying cash for the data). Wesley stated that

counterparties were more willing to engage in barter

transactions with respect to data because it can be “difficult”

to quantify the cash value of such data. SAC ¶¶ 84-85. Wesley

also stated that comScore considered the data to be more

valuable than did its counterparties, insisting that comScore

acquired its barter counterparties’ data more cheaply in the

nonmonetary deals than comScore would by paying cash, and that

the data comScore received in the barter deals was more valuable

than the data it delivered. SAC ¶¶ 85-86. Wesley asserted that

comScore properly accounted for its nonmonetary transactions

based on comparable historic cash sales for the same data that

it had bartered. SAC ¶ 87. Wesley added that comScore understood

that it could not recognize revenue in connection with

nonmonetary data swaps unless it had “historic cash

transactions” for comparison, but assured the investors that the

barter counterparties were in fact “cash customers” for the data


14

that would have been willing to pay cash if necessary. SAC ¶¶

87-89.

Nevertheless, investors questioned whether comScore’s

accounting for nonmonetary transactions could “overstate . . .

revenue and understate . . . expense.” SAC ¶ 90. Wesley avowed

that comScore’s accounting was based on “historic sales for the

same product,” with Matta stating that “the guidelines are very,

very strict and we follow them to the ‘t.’” SAC ¶ 90. However,

Matta stated that comScore would going forward “avoid these

[barter] transactions whenever possible.” SAC ¶ 91.

According to the SAC, Matta and Wesley’s efforts worked. In

a report dated September 3, 2015, Bream Capital wrote that it

had met with comScore’s management regarding the nonmonetary

revenue issue, and that management expected nonmonetary revenue

to drop in 2016, which led Bream Capital to reiterate its “buy”

rating and $67 price target. SAC ¶ 81.

The plaintiffs also allege that Matta and Wesley had a

lunch meeting with Cantor Fitzgerald in which they reassured

Cantor Fitzgerald that comScore’s accounting for nonmonetary

transactions was proper. SAC ¶ 80. In a September 4, 2015

report, Cantor Fitzgerald stated: “While we’re not big fans of

barter transactions, we believe management has adequately

addressed the logic behind pursuing them and their benefits to


15

the business. . . . We remain positive on [comScore] and

maintain our BUY rating and $64 [target price].” SAC ¶ 80.

Meanwhile, comScore was engaged in serious negotiations to

acquire Rentrak, another media-measurement company that focused

on television and video data analysis. SAC ¶ 13. The SAC alleges

that comScore had considered acquiring Rentrak since around

December 2013, two months before the beginning of the Class

Period. Browne Decl., Ex. 4 (comScore and Rentrak Form 424(b)(3)

Joint Proxy) at 37; SAC ¶ 188. Discussions heated up in April

2015, which coincided with escalating amounts of reported

nonmonetary revenue. SAC ¶ 188. On September 29, 2015, comScore

agreed to acquire Rentrak in an all-stock transaction that

valued Rentrak at $827 million. SAC ¶¶ 13, 93, 95. The SAC

alleges that the Merger was made possible by the misstated

nonmonetary revenues, which had inflated comScore’s stock price.

SAC ¶¶ 95, 188.

Following the disclosure that comScore intended to acquire

Rentrak, comScore announced “another quarter of record revenues”

for the third quarter of 2015. SAC ¶ 99. During an earnings call

on November 5, 2015, Wesley addressed the nonmonetary revenue

issue, noting that he expected barter revenue to decline in the

future. SAC ¶ 100.

The market was placated. Cantor Fitzgerald wrote in a

November 5, 2015 report that it “believe[d] [nonmonetary


16

revenue] concerns should now be put to rest,” raised its stock

price target from $60 to $64, and “maintain[ed] a BUY rating on

[comScore] after virtually in-line 3Q:15 results, which show

that organic growth remains very healthy even as nonmonetary

revenue (a hot topic throughout the quarter) drops below 10% of

total revenue.” SAC ¶ 102. On November 6, 2015, comScore’s stock

price increased more than 5%, from $44.31 to $46.57. SAC ¶ 103.

On November 25, 2015, the SEC issued a nonpublic comment

letter to comScore regarding the company’s accounting for

nonmonetary revenue. SAC ¶¶ 14, 104. In a response signed by

Wesley (with a cc to Matta) published on the SEC’s website on or

around December 3, 2015, comScore “supplementally advise[d] the

Staff that all of its monetary transactions were consistent with

its typical forms of transactions with data source providers for

which costs are recognized and customer transactions for which

revenue is recognized. . . . The Company concluded that such

transactions were consistent with its accounting policies and

with the terms of similar transactions with other ordinary

course transactions but for the nonmonetary element.” SAC ¶¶

104-05.

On January 28, 2016, the shareholders of comScore and

Rentrak approved the Merger. Rentrak became a wholly owned

subsidiary of comScore. SAC ¶ 97.


17

On February 17, 2016, comScore filed a Form 8-K and

accompanying press release to preannounce its annual results for

2016. SAC ¶ 106. The press release stated: “comScore achieved

record annual GAAP revenue of $368.8 million, an increase of 12%

compared to 2014.” SAC ¶ 106. On the same day, Matta and Wesley

participated in an investor conference call during which Matta

touted comScore’s “record revenues” and Wesley emphasized the

decreasing importance of nonmonetary revenue to comScore’s

revenue growth. SAC ¶ 107.

On February 29, 2016, the plaintiffs allege that the 10(b)

defendants’ scheme finally began to fall apart when comScore

filed a Form 12b-25 Notification of Late Filing to disclose that

it would be unable to file its 2015 Form 10-K because:

On February 19, 2016, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) received a message regarding certain potential accounting matters. In response, the Audit Committee immediately commenced a review of the matters with the assistance of independent counsel and advisors. As a result, the Company has not finalized its financial statements pending completion of the review, and the Company is not in a position to file its Form 10-K until after the completion of the Audit Committee’s review. The Company expects to file the Form 10-K by March 15, 2016, which is within the permitted 15-day extension of the prescribed due date of February 29, 2016.

SAC ¶ 109. On March 1, 2016, comScore’s stock price fell by

2.8% from $41.15 to $40.00. Several analysts cautioned investors

not to overreact because the company expected to file its end-


18

of-year results by March 15, 2015. SAC ¶ 110. On March 7, 2016,

comScore announced that it was unlikely to meet that filing date

due to the internal review. SAC ¶ 111. comScore also disclosed

that it had “proactively” contacted the SEC. SAC ¶ 112.

Analysts reacted negatively, with the Wall Street Journal

querying whether “comScore pushed the envelope with its

accounting . . . too far.” SAC ¶ 113. On March 7, 2016,

comScore’s stock price plummeted by 33.5%, from $40.71 to

$27.04. SAC ¶ 113.

Over the next few months, in several filings, comScore

announced that it would have to postpone its earnings

announcements due to what had become an internal investigation.

SAC ¶¶ 114-16. The NASDAQ threatened to delist comScore for

failure to comply with the Exchange’s periodic reporting

requirements. SAC ¶¶ 114, 120-21, 127-29.

On July 22, 2016, comScore announced that Abraham had

stepped down as Executive Chairman of comScore’s Board of

Directors, but stated that he would remain a director through

the expiration of his term in 2018. SAC ¶ 117.

On August 10, 2016, comScore announced that it still could

not release any earnings information, but disclosed:

The internal investigation is substantially complete, and the Audit Committee has identified certain areas of potential concern, including with respect to certain accounting and disclosure practices and controls that the Company, with input from its


19

consultants and counsel, is further analyzing. The accounting transactions at issue mainly relate to certain non-monetary transactions. The Company has not yet concluded whether any of these or other transactions of concern were incorrectly recorded at the time of the transactions. SAC ¶ 118. On the same day, comScore announced that Matta

and Wesley would no longer serve as the company’s CEO and CFO,

respectively. SAC ¶ 119. However, both Matta and Wesley were to

remain with the company. Matta was to remain on the Board of

Directors and serve as an Executive Vice Chairman and an advisor

to comScore’s new CEO, Fulgoni, who had co-founded comScore

along with Abraham. SAC ¶ 119. Wesley was to serve as an

Executive Vice President and an advisor to comScore’s new CFO,

Chemerow, the company’s former Chief Revenue Officer. SAC ¶ 119.

One month later, on September 8 and 12, 2016, respectively,

comScore announced that Wesley and Matta had tendered their

resignations effective October 10, 2016. comScore Form 8-K dated

Sept. 8, 2016; comScore Form 8-K dated Sept. 12, 2016; see also

SAC ¶ 36. Matta would, however, remain on the Board of

Directors.

On September 15, 2016, comScore filed a Form 8-K announcing

the partial results of the internal investigation: the Audit

Committee had concluded that comScore would have to restate its

financial results for the years ended December 31, 2013 and 2014

and for the quarters ended September 30, 2015, June 30, 2015,


20

and March 31, 2015, as well as its preliminary financial

statements for the quarter and year ended December 31, 2015. SAC

¶ 122. comScore disclosed that,

“[it had] concluded that revenue and expenses associated with all nonmonetary transactions during [these] periods . . . should be reversed and accounted for at historical cost rather than at fair value. There is no historical cost basis associated with the assets that [comScore] exchanged and therefore there should be no revenue recognized or expenses incurred for those transactions. While a nonmonetary transaction inherently has no effect on operating income or cash flow over the life of the relevant agreement governing such transaction, the timing of revenue recognized relative to the related expense recognized may have an effect on a periodic basis. As previously disclosed, the Company does not expect in the future to enter into any nonmonetary transactions that would result in the recognition of revenue. Hendon Decl., Ex. 7 (comScore Form 8-K dated Sept. 23,

2016) (emphasis added); see also SAC ¶ 123. At that point,

comScore attributed the misstatements to “certain activities

that reflect errors in judgment with respect to certain

accounting practices and resulting disclosures as well as

deficiencies in the Company’s internal control system.” Hendon

Decl., Ex. 7. comScore also disclosed: “Based on the results of

the investigation to date, certain remediation actions have been

recommended by the Audit Committee, with a view toward improved

accounting and internal control practices.” Hendon Decl., Ex. 7.

In a Form 8-K dated November 23, 2016, comScore disclosed

the results of the completed internal investigation. comScore


21

reaffirmed that it would have to restate the aforementioned

financial statements because it could not “support” its previous

accounting for nonmonetary transactions. SAC ¶ 130. However, in

what the Wall Street Journal described as “a pre-Thanksgiving

turkey . . . buried after the market closed ahead of the

holiday,” SAC ¶ 130, the company disclosed that it no longer

attributed the misstatements to mere “errors in judgment”;

rather, “The Audit Committee’s investigation concluded that, as

a result of certain instances of misconduct and errors in

accounting determinations, adjustments to the Company’s

accounting for certain nonmonetary and monetary transactions

were required.” Micheletto Decl., Ex. B (emphasis added).

According to the disclosure:

Based on its investigation, the Audit Committee also found that, for the nonmonetary transactions under review, facts collected during the investigation called aspects of the transactions into question, including instances where additional arrangements were entered into and not properly disclosed to the Company’s accounting group and instances where there did not appear to be a clear need for all of the data that was being exchanged. . . . The Audit Committee also determined that the accounting treatment for certain monetary transactions will need to be adjusted, principally relating to the timing of revenue recognition. One of these transactions involved over-delivery of data that recurred in multiple periods, two others included potential undisclosed additional arrangements that required contemporaneous contracts to be accounted for as a single arrangement, and one related to partially delayed invoicing for delivered data inconsistent with the terms of the contract. The Company is in the


22

process of reviewing the adjustments for these transactions as well as several journal entries identified during the investigation. Micheletto Decl., Ex. B. The disclosure announced that

“[t]he Audit Committee’s investigation also identified concerns

regarding internal control deficiencies, including concerns

about tone at the top; errors in judgment identified with

respect to issues reviewed; information not having been provided

to the Company’s accounting group and its external auditors; and

the sufficiency of public disclosures made by the Company about

certain performance metrics.” Micheletto Decl., Ex. B. In

contrast to the remedial plans previously announced, comScore

disclosed that it would consider and implement stronger remedial

measures to improve accounting and internal controls, including,

“separating certain Company personnel; enhancing communications

to support a robust control environment; strengthening the

Company’s disclosure controls, including through disclosure

committee enhancements; strengthening controls around the

Company’s revenue recognition practices, including controls

related to contract administration and delivery of data; and

enhancing the Company’s internal audit and compliance

functions.” Micheletto Decl., Ex. B (emphasis added). Finally,

comScore announced that it would be reviewing transactions

outside the scope of the original investigation, which could


23

require additional, material accounting adjustments to monetary

transactions. Micheletto Decl., Ex. B.

Within a month, in December 2016, Abraham and Matta each

resigned from the Board of Directors. SAC ¶¶ 35, 37.

On February 8, 2017, NASDAQ suspended trading of comScore

common stock. Brown Decl., Ex. 3 (comScore Form 8-K dated Mar.

9, 2017).

During the Class Period, Abraham sold 92% of the shares

that he directly owned, while related parties sold 57% of their

shares, for a total value of $31.5 million. SAC ¶¶ 176 & n.1,

181. Matta sold 68% of his shares for a value of $18.1 million.

SAC ¶¶ 176, 179. Wesley sold 83% of his comScore shares for a

value of $3.4 million.2 See Micheletto Decl., Exs. G, J; see also

SAC ¶¶ 176, 180. Tarpey sold 22% of his shares for a value of

$1.8 million. SAC ¶¶ 176, 182.

The SAC alleges that each individual 10(b) defendant made

numerous materially false and misleading statements during the

Class Period, primarily in comScore’s filings and on investor

calls. See SAC ¶¶ SAC 200-494. Each of the individual 10(b)

defendants signed at least one earnings disclosure that

misstated comScore’s revenue and revenue related metrics, see,

2 As the 10(b) defendants correctly note, the SAC overstated Wesley’s sales because it failed to factor the cost of certain options that Wesley exercised (a fact the plaintiffs do not contest).


24

e.g., SAC ¶¶ 217, 311, and at least one Sarbanes–Oxley Act

(“SOX”) Certification affirming the truth and completeness of

the reports, and attesting to comScore’s internal controls over

financial reporting and disclosure systems. See, e.g., SAC ¶¶

226, 258. The SAC alleges that the 10(b) defendants knew that

any statement regarding revenue or related revenue metrics

(including projections), or compliance with GAAP, was false and

misleading at the time the statement was made.

B.

The following facts are primarily relevant to Counts III,

IV, and V.

In the midst of Merger negotiations between comScore and

Rentrak during the summer of 2015, Rentrak retained the

accounting firm Grant Thornton LLP (“Grant Thornton”) to perform

financial due diligence on comScore. SAC ¶¶ 552-53. In a report

dated September 4, 2015 (the “Grant Thornton Report”), Grant

Thornton warned Rentrak’s Board of Directors that:

• comScore’s use of nonmonetary, i.e., barter, transactions for the sharing of data or exchange of services that comScore had accounted for as revenue “may have provided opportunities for [comScore] Management to ‘manage’ revenues to meet targets.”

• comScore’s use of nonmonetary transactions “may not be fully understood by analysts and investors. It was unclear how much comScore’s stock price may be impacted if comScore’s nonmonetary transactions are better understood.”


25

• It was unclear how much analysts had incorporated non-monetary transactions into their forecasts for comScore. And it was unclear if analysts understood how non-monetary transactions affected revenue and earnings.

• comScore’s consensus revenue for virtually all

periods would not have been achievable without the nonmonetary revenue.

SAC ¶ 557.3 Despite the “red flags,” Rentrak ultimately

agreed to the Merger with comScore, which was announced on

September 29, 2015 in a Form 8-K with the merger agreement

attached as an exhibit. SAC ¶ 559. On December 23, 2015, the

companies filed a Joint Proxy recommending that their respective

shareholders vote in favor of the Merger. SAC ¶ 563. While the

Joint Proxy disclosed the fact of Grant Thornton’s due

diligence, SAC ¶ 579, the Joint Proxy and other proxy

solicitation materials did not discuss any red flags identified

by Grant Thornton. See, e.g., SAC ¶¶ 563-64. Moreover, plaintiff

Huff alleges that the Joint Proxy (including documents

incorporated by reference) and other proxy solicitation

materials misstated comScore’s revenue and other items, such as

comScore’s compliance with GAAP. See SAC ¶¶ 566-616.

In addition, in connection with the Merger, comScore filed

a registration statement (the “Registration Statement”) that was

declared effective, as amended, on December 23, 2015. SAC ¶ 613.

3 There is no allegation that any of the comScore defendants learned about the contents of the Grant Thornton Report during the Class Period.


26

The Registration Statement was signed by Matta, Wesley, Abraham,

Fulgoni, Fradin, Henderson, Katz, Korn, and Lewis (the “comScore

individual Merger defendants”). The Registration Statement

included a preliminary prospectus and other documents related to

the Merger that contained, among other things, allegedly untrue

statements related to reported revenues and revenue related

metrics. SAC ¶¶ 613-616.

III.

The 10(b) defendants have moved to dismiss the 10(b) claims

in Count I for failure to plead an actionable misrepresentation

or omission, and for failure to plead scienter. Tarpey has

separately moved to dismiss the 10(b) claims for failure to

plead materiality.

Section 10(b), as effectuated by Rule 10b-5, makes it

“unlawful for any person . . . [t]o make any untrue statement of

a material fact or to omit to state a material fact necessary in

order to make the statements made, in the light of the

circumstances under which they were made, not misleading.” 17

C.F.R. § 240.10b–5(b). To state a claim under Section 10(b) and

Rule 10b-5, the plaintiffs must allege that the defendants, in

connection with the purchase or sale of securities, made a

materially false statement or omitted a material fact, with

scienter, and that the plaintiffs' reliance on the defendants'

action caused injury to the plaintiffs. Ganino v. Citizens


27

Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000); see also In re

Lions Gate Entm’t Corp. Sec. Litig., 165 F. Supp. 3d 1, 10

(S.D.N.Y. 2016).

A.

In light of comScore’s admission that it must restate its

financial statements, there can be no dispute that the SAC

pleads numerous false and misleading misstatements with respect

to revenue, revenue related metrics, and comScore’s compliance

with GAAP. See Varghese v. China Shenghuo Pharm. Holdings, Inc.,

672 F. Supp. 2d 596, 606 (S.D.N.Y. 2009) (“Misreported financial

information clearly amounts to a false statement of fact.”).

Under GAAP, “previously issued financial statements should be

restated only to correct material accounting errors that existed

at the time the statements were originally issued.” In re Atlas

Air Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474,

486 (S.D.N.Y. 2004) (citations omitted). “Although a restatement

is not an admission of wrongdoing, the mere fact that financial

results were restated is sufficient basis for pleading that

those statements were false when made.” S.E.C. v. Espuelas, 908

F. Supp. 2d 402, 410 n.5 (S.D.N.Y. 2012) (quoting Atlas Air, 324

F. Supp. 2d at 486). The plaintiffs have sufficiently alleged


28

that the revenue numbers that comScore reported during the Class

Period were improperly inflated by $43.2 million.4

Rather than challenge the falsity of the vast majority of

the statements, the 10(b) defendants argue that the statements

are not actionable. The majority of the 10(b) defendants’

arguments rest on the same proposition, namely, that the SAC

does not establish mendacity on the part of the speaker. The

10(b) defendants argue that the SAC alleges, at best, that the

restatement was the result of innocent “human” accounting

errors, and thus that the misstatements are not actionable

because they were subjective opinions, forward-looking

statements, and puffery.

But comScore has admitted to wrongdoing. The 10(b)

defendants seriously understate comScore’s stated rationale for

the restatement: “The Audit Committee’s investigation concluded

that, as a result of certain instances of misconduct and errors

in accounting determinations, adjustments to [comScore’s]

accounting for certain nonmonetary and monetary transactions

were required.” Micheletto Decl., Ex. B (emphasis added). Read

in the light most favorable to the plaintiffs, the accounting

for nonmonetary transactions cannot be supported because of

misconduct. Based on other portions of the disclosure, it is a

4 The plaintiffs do not rely on the disclosure that comScore’s revenues from monetary transactions will have to be adjusted to support their claims.


29

reasonable inference that comScore entered into unnecessary

nonmonetary transactions that were intentionally and erroneously

assessed on a fair value basis even though there was no

legitimate justification for that treatment and instead that the

reason for this treatment was to boost revenues. See Micheletto

Decl., Ex. B (noting the lack of a “clear need” for the

nonmonetary transactions). Based on the disclosure, it is also

plausible that comScore’s accounting group and auditor (Ernst &

Young) were not given pertinent information about the

transactions so that they would not detect the fraud. See

Micheletto Decl., Ex. B.

Contrary to the 10(b) defendants’ arguments, this is not a

case where a restatement can plausibly be attributed to mere

errors in accounting judgment. The 10(b) defendants quibble over

the dictionary definition of “misconduct,” arguing that

misconduct can be consistent with wholly innocent or accidental

behavior. The meaning of misconduct cannot be parsed in the way

the 10(b) defendants propose nor can its import be minimized at

the pleading stage. While the disclosure does not single out any

individual, the SAC plausibly connects each 10(b) defendant to

the misconduct. The SAC plausibly pleads that each 10(b)

defendant made misrepresentations with “intent to deceive,

manipulate, or defraud, or at least knowing misconduct.” SEC v.


30

First Jersey Sec., Inc., 101 F.3d 1450, 1467 (2d Cir. 1996)

(citation omitted) (emphasis added).

At various points, the 10(b) defendants attempt to cordon

the disclosure, arguing that it is limited to a specific time

period or subset of transactions within the Class Period. The

reasonable interpretation of the disclosure is that the

misconduct was related to the accounting for the nonmonetary

transactions and extended throughout the Class Period.

The individual 10(b) defendants attempt to parse the

disclosure in other ways, all of which are without merit. Fairly

read in the light most favorable to the plaintiffs, the Audit

Committee’s investigation concluded that the primary driver

behind the restatement was misconduct. The investigation “also”

identified other issues that called “aspects” of the nonmonetary

transactions “into question” and additional issues with respect

to internal control deficiencies, some of which are more

damaging to the 10(b) defendants than others. Micheletto Decl.,

Ex. B. The addition of additional problems does not dilute the

admission of misconduct.

Wesley argues that any statements he made were subjective

opinions. Wesley cites In re Gen. Elec. Co. Sec. Litig., 856 F.

Supp. 2d 645 (S.D.N.Y. 2012), for the proposition that

“[s]tatements estimating the fair market value of assets are

opinions, not matters of objective fact.” Id. at 653 (citing


31

Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir.

2011)). That case does not help Wesley because the court noted

that allegations of misstated asset valuations attributable to

“improper accounting practices” raise issues of objective fact

that are not protected as opinion statements. Id. at 657-58 &

n.2; see also Underland v. Alter, No. CIV.A. 10-3621, 2011 WL

4017908, at *9 (E.D. Pa. Sept. 9, 2011) (“Unlike a subjective

evaluation that a loan reserve is adequate or not,

nonconformance to a stated methodology to arrive at a loan loss

reserve amount is a measurable objective fact.”).

This case is not about complex accounting judgments over

which reasonable minds can differ. The plaintiffs allege that

GAAP was irrelevant to the accounting calculus except to the

extent that the 10(b) defendants used the accounting standards

as a cover to inflate revenues. See In re Glob. Crossing, Ltd.

Sec. Litig., 322 F. Supp. 2d 319, 341 (S.D.N.Y. 2004) (“The

gravamen of plaintiffs’ Complaint is that these exchanges were

essentially unnecessary mirror-image transactions created with

the specific intention of inflating the Companies' revenues and

deceiving investors into thinking the company was financially

sound when it was, in fact, in increasingly perilous straits.”).

The allegations --- including the disclosure of misconduct; the

plausible inference from the disclosure that the 10(b)

defendants were entering into gratuitous data swaps and avoiding


32

disclosing pertinent information to comScore’s accounting group

and auditor to evade detection; the assurances by Matta and

Wesley on the SunTrust Call that historic cash comparators

existed for the nonmonetary transactions (when they did not),

see SAC ¶ 87 (Wesley stating: “[I]f you don’t have historic cash

transactions for the products or services that you are selling

in a nonmonetary transaction, you cannot under the guidance

recognize revenue in connection with that transaction.”); the

Audit Committee’s determination that none of the revenues from

the nonmonetary transactions could be recognized; and the

alacrity with which the company disclaimed future reliance on

nonmonetary transactions after the Wall Street Journal

questioned comScore’s accounting --- plausibly establish that

the inclusion of nonmonetary transactions as revenue in the

financial statements, and the statements that nonmonetary

transactions were evaluated using ASC 845, were false and

misleading statements of objective fact.

In re Hertz Glob. Holdings, Inc. Sec. Litig., No. CV 13-

7050, 2017 WL 1536223 (D.N.J. Apr. 27, 2017), like the other

cases cited by Wesley, is distinguishable. In that case, the

plaintiff did “not allege that [the defendant-company] bypassed

a methodology or metric, but that [the defendant-company]

applied its methodologies incorrectly,” which raised issues of

subjective opinion. Id. at *12; see also Harris v. AmTrust Fin.


33

Servs., Inc., 135 F. Supp. 3d 155, 162 n.9, 172 (S.D.N.Y. 2015)

(declining to intuit a GAAP violation in the absence of a

restatement), aff’d, 649 F. App'x 7 (2d Cir. 2016) (summary

order); In re MF Glob. Holdings Ltd. Sec. Litig., 982 F. Supp.

2d 277, 313 (S.D.N.Y. 2013) (“[T]his case is not one in which

the complaint alleges that a company ‘engaged in improper

accounting practices.’” (citation and internal quotation marks

omitted)). Here, the plaintiffs have sufficiently alleged that

the 10(b) defendants bypassed the asserted accounting

methodology in perpetrating the alleged fraud, an allegation

supported by the Audit Committee’s determination that no revenue

from any nonmonetary transaction could be included in the

financial statements.

Moreover, treating any of the alleged misstatements as

subjective opinions pursuant to Omnicare, Inc. v. Laborers Dist.

Council Const. Indus. Pension Fund, 135 S. Ct. 1318, 1327

(2015), would not aid Wesley (or the other 10(b) defendants).

Assuming Omnicare applies in the 10(b) context,5 “[f]or a

5 The parties assume that Omnicare applies to Section 10(b) claims. Although there has been some indication that Omnicare applies outside of the Section 11 context in which it arose, see City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 616 (9th Cir. 2017), the Court of Appeals for the Second Circuit has not “directly held that Omnicare applies to Section 10(b) [and] Rule 10b–5 . . . claims.” Sec. & Exch. Comm'n v. Thompson, No. 14-CV-9126 (KBF), 2017 WL 874973, at *17 (S.D.N.Y. Mar. 2, 2017). It is


34

statement of belief or opinion to be actionable under Section

10(b), a plaintiff must allege that (1) ‘the speaker did not

hold the belief she professed,’ (2) ‘the supporting fact[s] she

supplied were untrue,’ or (3) the stated opinion, ‘though

sincerely held and otherwise true as a matter of fact,’

‘omit[ted] information whose omission ma[de] the [stated

opinion] misleading to a reasonable investor.’” N. Collier Fire

Control & Rescue Dist. Firefighter Pension Plan & Plymouth Cty.

Ret. Ass'n v. MDC Partners, Inc., No. 15 CIV. 6034 (RJS), 2016

WL 5794774, at *10 (S.D.N.Y. Sept. 30, 2016) (quoting Tongue v.

Sanofi, 816 F.3d 199, 209 (2d Cir. 2016)).

The allegations meet all three Omnicare tests for alleging

falsity.6 The allegations plausibly and specifically claim that

Wesley (and the other 10(b) defendants) did not honestly hold

any opinions professed. See In re Petrobras Sec. Litig., 116 F.

Supp. 3d 368, 380 (S.D.N.Y. 2015). Moreover, there are

sufficient allegations that any opinions were predicated on

untrue statements of fact and “omit[ed] material facts about

[each] speaker's inquiry into or knowledge of facts that would

support the stated opinion.” In re Salix Pharm., Ltd., No. 14-

unnecessary to address the precise reach of Omnicare because its application would not affect the outcome of this case. 6 For this reason, it is unnecessary to parse which statements could be fairly characterized as opinion statements.


35

CV-8925 (KMW), 2016 WL 1629341, at *12 n.10 (S.D.N.Y. Apr. 22,

2016).7

The 10(b) defendants argue that any statements regarding

revenue projections --- such as instances where Tarpey and

Wesley stated that comScore was increasing its revenue guidance,

see, e.g., SAC ¶¶ 276, 308, or where Matta stated, “[B]ased on

the revenue growth and the flow through to the bottom line, we

feel like over the next three to five years, this should be a

mid-20%s EBITDA margin,” SAC ¶ 291 --- are protected under the

PSLRA’s safe harbor as forward-looking statements. See 15 U.S.C.

§ 78u–5(c)(1)(A-B). Pursuant to the safe harbor, “a defendant is

not liable if the forward-looking statement is identified and

accompanied by meaningful cautionary language or is immaterial

or the plaintiff fails to prove that it was made with actual

knowledge that it was false or misleading.” Slayton v. Am. Exp.

Co., 604 F.3d 758, 766 (2d Cir. 2010).

The safe harbor is inapplicable. The 10(b) defendants do

not contest materiality, with the exception of Tarpey (his

argument, which is without merit, is addressed below), and the

SAC sufficiently alleges that each 10(b) defendant made the

projections knowing that they were based on a false premise:

7 Wesley’s papers state that he does not believe that any accounting determinations he made were erroneous. See Wesley Reply Mem. at 3. That type of assertion is not properly considered on a motion to dismiss.


36

nonexistent revenue. The 10(b) defendants point to cautionary

language accompanying their statements that, among other things,

warned investors that changes to accounting interpretations or

methods could result in a restatement of financial results. See,

e.g., Micheletto Ex. C (Excerpts from comScore 2013 and 2014

Form 10-Ks). The risk factors plainly did not warn investors

about the relevant risk that led to the restatement: misconduct.

See Salix, 2016 WL 1629341, at *11 (“To be eligible for the safe

harbor, ‘the relevant cautionary language must be prominent and

specific, and must directly address exactly the risk that

plaintiffs claim was not disclosed.’” (citation and internal

quotation marks omitted)). Moreover, resort to cautionary

language cannot aid the 10(b) defendants in light of the

plausible allegations that the 10(b) defendants knew at the time

that a significant portion of the revenue undergirding their

revenue projections was fictitious. See In re Harman Int'l

Indus., Inc. Sec. Litig., 791 F.3d 90, 102 (D.C. Cir. 2015)

(“[C]autionary language cannot be ‘meaningful’ if it is

‘misleading in light of historical fact[s]’ . . . ‘that were

established at the time the statement was made.’” (quoting

Slayton, 604 F.3d at 769-70)).

The 10(b) defendants also move to dismiss the same

statements regarding projections as inactionable expressions of

puffery and corporate optimism. However, the alleged


37

misstatements were more than mere puffery because they were

grounded in historical facts (false revenue numbers) that the

10(b) defendants allegedly knew to be false and because they

were plausibly designed to mislead investors into believing that

comScore’s present (as well as its future) was rosier than

reality. See, e.g., Plumbers & Pipefitters Local Union No. 630

Pension-Annuity Trust Fund v. Arbitron Inc., 741 F. Supp. 2d

474, 485 (S.D.N.Y. 2010), as corrected (Sept. 30, 2010); In re

Symbol Techs., Inc. Sec. Litig., No. 05-CV-3923 (DRH), 2013 WL

6330665, at *7 (E.D.N.Y. Dec. 5, 2013); compare SAC ¶ 276

(Tarpey stating: “We’re now raising our full year 2014 revenue

outlook due to the continued momentum of the business. For 2014,

we now anticipate revenues in the range of $320.5 million to

$329.5 million.”), SAC ¶ 291 (similar statement by Matta), SAC ¶

373 (similar statement by Wesley), with In re Nortel Networks

Corp. Sec. Litig., 238 F. Supp. 2d 613, 628 (S.D.N.Y. 2003)

(statement that “Based on the momentum we have experienced

during the first nine months and the strong order backlog, we

continue to expect our percentage growth in 2000 over 1999 will

be in the low 40’s” was not a “simply ‘soft’ prediction” because

“there was no such momentum”).

Finally, Tarpey argues that the SAC fails to plead with

particularity the falsity of any statements he made with respect

to the sufficiency of comScore’s internal controls because he


38

only made statements toward the beginning of the Class Period.

It is a reasonable inference that the internal controls

deficiencies identified in the November 23, 2016 Form 8-K

extended through the Class Period, including the filings that

Tarpey signed, which will have to be restated. There are

sufficient allegations that the statements regarding the

internal controls were false and misleading throughout the Class

Period, and that each of the 10(b) defendants “disbelieved the

alleged statements [including with respect to internal controls]

at the time they were made.” Petrobras, 116 F. Supp. 3d at 381.

Accordingly, the motions to dismiss the 10(b) claims in

Count I based on the lack of falsity of the alleged

misrepresentations and omissions are denied.

B.

Tarpey has moved to dismiss the 10(b) claim in Count I

against him for failure to allege materiality. Tarpey argues

that, for the period he was CFO, nonmonetary revenue to be

restated represented approximately 1%, 3%, and 2%, respectively,

of comScore’s total revenues for end-of-year 2013 and the first

and second quarters of 2014, meaning that any misstatements he

made during this period were presumptively quantitatively

immaterial. See Hutchison v. Deutsche Bank Sec. Inc., 647 F.3d

479, 487 (2d Cir. 2011) (quantitative materiality typically

rests on a numerical threshold of 5%).


39

“A statement or omission is material if ‘there is a

substantial likelihood that a reasonable shareholder would

consider it important in deciding how to act.’” IBEW Local Union

No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank of Scotland

Grp., PLC, 783 F.3d 383, 389 (2d Cir. 2015) (citation omitted).

A complaint may not be dismissed “on the ground that the alleged

misstatements or omissions are not material unless they are so

obviously unimportant to a reasonable investor that reasonable

minds could not differ on the question of their importance.”

ECA, Local 134 IBEW Joint Pension Tr. of Chicago v. JP Morgan

Chase Co., 553 F.3d 187, 197 (2d Cir. 2009) (citation omitted).

The Court of Appeals for the Second Circuit has explained

that courts must fully analyze “all relevant considerations”

when assessing materiality. Litwin v. Blackstone Group, L.P.,

634 F.3d 706, 717 (2d Cir. 2011); Hutchison, 647 F.3d at 485.

Under the holistic analysis endorsed by the Court of Appeals,

sufficiently strong qualitative evidence of materiality can

establish materiality as a matter of law. Litwin, 634 F.3d at

717–18. The qualitative inquiry is guided by SEC Staff

Accounting Bulletin No. 99 (“SAB 99”), 64 Fed. Reg. 45,150

(1999). Id. at 717; see also Eletrobras, 2017 WL 1157138, at *7.

SAB 99 provides a non-exhaustive list of the relevant

qualitative factors that could render material a quantitatively

small misstatement of a financial statement item. See SAB 99, 64


40

Fed. Reg. at 45,152. Among these factors is management’s

expectations regarding whether a known misstatement may result

in a significant negative market reaction. SAB 99, 64 Fed. Reg.

at 45,152. The very fact of the restatement and thus comScore’s

conclusion that the financials were materially misstated at the

time Tarpey made alleged misrepresentations “belies any

suggestion that any misstatement or omission was not material.”

S.E.C. v. Kelly, 663 F. Supp. 2d 276, 285 (S.D.N.Y. 2009);

accord Warchol v. Green Mountain Coffee Roasters, Inc., No. 10-

CV-227, 2012 WL 256099, at *5 (D. Vt. Jan. 27, 2012).

The alleged misstatements plausibly implicate other SAB

factors. The alleged misstatements by Tarpey plausibly affected

comScore’s “compliance with regulatory requirements,” SAB 99, 64

Fed. Reg. at 45,152, because the misstated earnings and false

promises of compliance with GAAP plausibly contributed to

comScore’s inability to comply with its periodic reporting

requirements and subsequent suspension from NASDAQ. The

misstatements also plausibly “mask[ed] a change in earnings or

other trends” and “hid[] a failure to meet analysts’ consensus

expectations for the enterprise,” SAB 99, 64 Fed. Reg. at

45,152, because the misstatements enabled Tarpey to give more

robust (and false) guidance about comScore’s financial health.

See Eletrobras, 2017 WL 1157138, at *8; In re Take-Two

Interactive Sec. Litig., 551 F. Supp. 2d 247, 291 (S.D.N.Y.


41

2008) (categorization of company as “a growth company”

contributed to finding of materiality where earnings were

misstated). It is plausible that comScore’s revenue growth ---

overstated by approximately 10.1%, 27.2%, and 17.8% for the end-

of-year 2013 and first two quarters of 2014, respectively ---

was material to investors: analysts highlighted comScore’s

revenue growth as an important metric, see, e.g., SAC ¶ 3, 44,

as did Tarpey, repeatedly, see, e.g., SAC ¶¶ 211, 214, 231, 244,

247, 273, 276. The Grant Thornton Report specifically identified

comScore’s disclosures with respect to nonmonetary revenue as

something that “may not be fully understood by analysts and

investors” and warned that a “better under[standing]” could

adversely affect comScore’s stock price. SAC ¶ 94.

A better understanding did affect comScore’s stock price.

comScore’s significant stock drop further supports an inference

of materiality. See Eletrobras, 2017 WL 1157138, at *9 (“While

market volatility alone is too blunt an instrument to be

depended on in considering whether a fact is material, the

significant volatility of [the company’s securities], considered

in aggregate with other SAB 99 factors, preclude the conclusion

that the alleged misstatements and omissions . . . were so

obviously unimportant to a reasonable investor to be

immaterial.” (citations, internal quotations marks, and footnote

omitted)).


42

As he did in connection with his arguments regarding the

falsity of his statements on internal controls, Tarpey argues

that the statements he made earlier in the Class Period (though

plausibly false and misleading, and determined to be materially

so by comScore) were categorically immaterial to investors.

Although Tarpey would attribute comScore’s restatement, stock

drop and regulatory woes to misstatements made later in the

Class Period by the other 10(b) defendants, that inference could

not be drawn on a motion to dismiss.

Accordingly, Tarpey’s motion to dismiss the 10(b) claim in

Count I for failure to plead materiality is denied.

C.

The 10(b) defendants argue that the SAC has failed to plead

scienter.

The scienter required to support a securities fraud claim

can be “intent to deceive, manipulate, or defraud, or at least

knowing misconduct.” First Jersey, 101 F.3d at 1467 (citations

omitted). The PSLRA requires that a complaint alleging

securities fraud “state with particularity facts giving rise to

a strong inference that the defendant[s] acted with the required

state of mind.” 15 U.S.C. § 78u-4(b)(2). Scienter may be

inferred from (i) facts showing that a defendant had “both

motive and opportunity to commit the fraud,” or (ii) facts that


43

constitute “strong circumstantial evidence of conscious

misbehavior or recklessness.” ATSI, 493 F.3d at 99.

In order to plead scienter adequately, the plaintiff must

allege facts supporting a strong inference with respect to each

defendant. See Arbitron, 741 F. Supp. 2d at 488. “[I]n

determining whether the pleaded facts give rise to a ‘strong’

inference of scienter, the court must take into account

plausible opposing inferences.” Tellabs, Inc. v. Makor Issues &

Rights, Ltd., 551 U.S. 308, 323 (2007). A complaint sufficiently

alleges scienter when “a reasonable person would deem the

inference of scienter cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.” Id.

at 324; see also Slayton, 604 F.3d at 766.

To raise a strong inference of scienter through motive and

opportunity to defraud, a plaintiff must allege that the

defendants “‘benefitted in some concrete and personal way from

the purported fraud.’” ECA, 553 F.3d at 198 (quoting Novak v.

Kasaks, 216 F.3d 300, 307–08 (2d Cir. 2000)). “Motives that are

common to most corporate officers, such as the desire for the

corporation to appear profitable and the desire to keep stock

prices high to increase officer compensation, do not constitute

‘motive’ for purposes of this inquiry.” Id. Motive is generally

shown by alleging that corporate insiders made the


44

misrepresentation in order to sell their own shares at a profit.

Id.

Where the defendants’ motive to commit fraud is not

apparent, “the strength of the circumstantial allegations [that

a defendant consciously or recklessly misbehaved] must be

correspondingly greater.” Kalnit v. Eichler, 264 F.3d 131, 142

(2d Cir. 2001) (citation and internal quotation marks omitted).

Plaintiffs typically allege conscious or reckless misbehavior by

pleading with specificity that the defendants had “knowledge of

facts or access to information contradicting their public

statements.” Novak, 216 F.3d at 308. As the Court of Appeals for

the Second Circuit has explained, “[r]eckless conduct is, at the

least, conduct which is highly unreasonable and which represents

an extreme departure from the standards of ordinary care . . .

to the extent that the danger was either known to the defendant

or so obvious that the defendant must have been aware of it.”

Chill v. Gen. Elec. Co., 101 F.3d 263, 269 (2d Cir. 1996)

(citation and internal quotation marks omitted); see also Lions

Gate, 165 F. Supp. 3d at 22–23.

Considering the allegations holistically, the SAC plausibly

alleges circumstantial facts from which to conclude conscious

misbehavior on the part of each individual 10(b) defendant, and

moreover plausibly alleges that the individual 10(b) defendants

had the motive and opportunity to overstate comScore’s revenues.


45

The November 23, 2016 Form 8-K’s admission that the

restatement of nonmonetary revenue was attributable to

misconduct, see Micheletto Decl., Ex. B, provides the starting

point. Based on comScore’s disclosure, it is plausible that the

misconduct stretched through the Class Period to when Tarpey and

Abraham were CFO and CEO, respectively. It is plausible that the

misconduct began under their regime, and continued under Wesley

and Matta.

The individual 10(b) defendants each seek to distance

themselves from the disclosure, arguing that it does not link

them to the misconduct with specificity. However, inferences of

misconduct that might be borderline in the absence of the

disclosure are magnified and must be viewed with increased

suspicion. See Eletrobras, 2017 WL 1157138, at *12 n.12 (finding

that the “clear implication of the disclosure” was that the

individual defendant was complicit in the alleged scheme).

Considered holistically, the SAC sufficiently connects each

individual 10(b) defendant to misconduct.

The internal control deficiencies identified in the

November 28, 2016 Form 8-K contribute to an inference of

scienter for Tarpey, Wesley, Matta, and Abraham. See id. at *11

(collecting cases). The deficiencies included “concerns about

tone at the top,” “information not having been provided to the

Company’s accounting group and its external auditors,” and “the


46

sufficiency of public disclosures made by the Company about

certain performance metrics.” Micheletto Decl., Ex. B. Unlike

cases in which misrepresentations plausibly result from issues

flowing from the bottom-up (for example, where subordinates fail

to give executives pertinent information), it is more plausible

based on the disclosure that the fraud flowed from the top-down.

It is plausible that when the company refers to deficiencies

surrounding public disclosures about performance metrics, it is

implicating the speakers about those subjects during the period:

Tarpey, Abraham, Wesley, and Matta. It is plausible that the

individual 10(b) defendants did not give relevant information to

the accounting group and auditors who could have caught the

fraud. Wesley notes that comScore’s auditor signed off on

comScore’s financial statements, but that is not a mitigating

circumstance in light of the plausible inference that the

individual 10(b) defendants did not disclose information to the

auditor to avoid detection.

It is undisputed that Tarpey, Abraham, Matta, and Wesley

were aware of and made statements about comScore’s revenue

recognition practices, including with respect to nonmonetary

revenue. Each of the individual 10(b) defendants spoke

extensively about comScore’s revenues during the Class Period.

The fictitious nonmonetary revenue plausibly allowed comScore to

raise revenue guidance and to meet analyst and market


47

expectations. Crediting the allegations, it is plausible that

the individual 10(b) defendants were aware that the revenues

were artificially inflated, or at the very least consciously or

recklessly disregarded the evidence that the revenues were

overstated. Eletrobras, 2017 WL 1157138, at *11.

The 10(b) defendants argue that executive turnover

undercuts an inference of scienter. But the improper assessment

of nonmonetary transactions on a fair value basis, even though

“there [was] no historical cost basis associated with the assets

that [comScore] exchanged,” Micheletto Decl., Ex. B, was first

made under Tarpey and Abraham. Similarly, the entrance into

unnecessary nonmonetary transactions and the failure to disclose

pertinent information about the nonmonetary transactions to

comScore’s accounting group plausibly occurred under both

regimes. The 10(b) defendants also overstate the degree of

turnover at the company. Matta became the President of comScore

in June 2013 while Tarpey and Abraham were still CFO and CEO,

respectively. Matta replaced Abraham as CEO while Tarpey was

still CFO. Abraham stayed at the company as the Executive

Chairman of the Board of Directors.

The campaign by Matta and Wesley to placate the market in

reaction to the inquires by the media, analysts, investors and

the SEC regarding comScore’s accounting practices provides

cogent support for the inference of scienter. Matta and Wesley


48

vociferously defended comScore’s treatment of nonmonetary

revenue (which had begun under Tarpey and Abraham). It is a

plausible and cogent inference that Matta and Wesley knew or

consciously disregarded the possibility that their protestations

of accurate accounting treatment for nonmonetary transactions

were false. When the Audit Committee examined the same

transactions, it found that none of the revenue could be

properly recognized, despite the detailed defenses by Matta and

Wesley. The false assurances that cash comparators for the

transactions existed and that “the guidelines” for barter

transactions “are very, very strict and we follow them to the

‘t,’” SAC ¶ 90, likewise contribute to the inference of

scienter. See Salix, 2016 WL 1629341, at *14; In re Marsh &

Mclennan Companies, Inc. Sec. Litig., 501 F. Supp. 2d 452, 486

(S.D.N.Y. 2006) (finding that “aggressive[] support[] [for] the

Company’s business practices” after they had been questioned

supported scienter).

The fact that revenues and other related metrics were “key

to measuring [comScore’s] financial performance and [were] a

subject about which investors and analysts often inquired”

further reinforces the inference of scienter. Dobina v.

Weatherford Int'l Ltd., 909 F. Supp. 2d 228, 247 (S.D.N.Y. 2012)

(quoting New Orleans Emps. Ret. Sys. v. Celestica, Inc., 455 F.

Appx. 10, 14 (2d Cir. 2011) (summary order))).


49

The timing and circumstances surrounding the resignations

of Abraham, Wesley, and Matta also contribute to the inference

of scienter with respect to those defendants. See In re OSG Sec.

Litig., 12 F. Supp. 3d 622, 633 n.84 (S.D.N.Y. 2014) (collecting

cases). In the November 28, 2016 Form 8-K, comScore disclosed

that one of its remedial measures for improving “accounting and

internal control practice . . . included . . . separating

certain personnel.” Micheletto Decl., Ex. B. It is plausible

that the targets of this remedial measure were Wesley, who left

the company toward the conclusion of the Audit Committee

investigation, and Matta and Abraham, who both resigned from the

Board of Directors within a month of the disclosure before their

terms expired. See Eletrobras, 2017 WL 1157138, at *12 n.6. The

resignations were contrary to comScore’s previous disclosures,

which had implied that Wesley and Matta would remain with the

company for longer periods, and expressly contradicted the

representation that Abraham would remain on the Board of

Directors through 2018. The individual 10(b) defendants contend

that the resignations were nonevents in the sense that companies

routinely clean house in the aftermath of negative news, but

that explanation lacks force in light of the disclosed remedial

measure.

The Court of Appeals for the Second Circuit has held that

the size of the purported fraud may contribute to an inference


50

of scienter. See In re Scholastic Corp. Sec. Litig., 252 F.3d

63, 77 (2d Cir. 2001) (holding that a total of $24 million in

charges “undermines, at the pleading stage, the argument that

the defendants were unaware” of any increase in returns);

Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir. 2000) (deeming

significant the “magnitude” of a defendant's write-off in

determining scienter); see also Plumbers & Pipefitters Nat.

Pension Fund v. Orthofix Int'l N.V., 89 F. Supp. 3d 602, 619

(S.D.N.Y. 2015). Here, the plausible allegations that the

individual 10(b) defendants failed to evaluate the nonmonetary

transactions using GAAP and affirmatively misrepresented that

the recognition of the revenue complied with GAAP when it did

not, the lack of any historical cost basis to evaluate any of

the nonmonetary transactions over the Class Period (despite the

assurances that such comparators existed), the need for a

restatement, and the 100% write-off of comScore’s nonmonetary

revenue of $43.2 million, all contribute to the inference of

scienter. See Salix, 2016 WL 1629341, at *13.

Accordingly, the circumstantial allegations are sufficient

to allege a strong inference of scienter with respect to each

individual 10(b) defendant that is more plausible than any

competing innocent inference.

The SAC also establishes motive and opportunity on the part

of each individual defendant. There is no dispute that the


51

individual defendants, as high-ranking officers who made alleged

misrepresentations with respect to comScore’s revenues, had the

opportunity to mislead the market with respect to revenues.

The SAC plausibly alleges that the individual 10(b)

defendants had the motive to inflate comScore’s stock price to

acquire Rentrak. See ECA, 553 F.3d at 201 n.6 (observing that

whether the artificial inflation of stock prices to acquire a

company can suffice for scienter purposes is extremely

contextual). The SAC establishes a direct line between the

Merger and the fraud. The plaintiffs allege that comScore and

Rentrak engaged in preliminary discussions regarding a merger in

December 2013. Browne Decl., Ex. 4 at 37. The scheme to inflate

revenues allegedly began two months later. The amount of

fictitious revenue escalated as Merger negotiations heated up,

culminating in the all-stock acquisition of Rentrak with

comScore’s artificially inflated stock. The acquisition occurred

shortly after Wesley and Matta defended their revenue

recognition practices to analysts and the market, which was

plausibly designed in part to keep the share price afloat so

that comScore could acquire Rentrak. The scheme fell apart less

than a month after the Merger was consummated.

The 10(b) defendants argue that the delay in the

acquisition and the fact that the intensity of negotiations may

have simmered at points renders the alleged motive implausible.


52

The argument that Merger discussions may not have been linear

does not eliminate the culpable inference that the purpose of

the fraud from the perspective of the individual 10(b)

defendants was, in part, to accomplish the acquisition. The form

of the all-stock acquisition, the timeline of events, and the

disclosure that the restatement is attributable to misconduct,

when combined with the other allegations, plausibly establishes

a culpable motive with respect to each individual 10(b)

defendant that is more cogent and compelling than any

alternative inference. See, e.g., Rothman v. Gregor, 220 F.3d

81, 92-94 (2d Cir. 2000); In re SLM Corp. Sec. Litig., 740 F.

Supp. 2d 542, 557 (S.D.N.Y. 2010); In re Vivendi Universal,

S.A., 381 F. Supp. 2d 158, 185 (S.D.N.Y. 2003); Burstyn v.

Worldwide Xceed Grp., Inc., No. 01 CIV. 1125 (GEL), 2002 WL

31191741, at *5 (S.D.N.Y. Sept. 30, 2002) (citing In re Complete

Mgmt. Inc. Sec. Litig., 153 F. Supp. 2d 314, 328 (S.D.N.Y.

2001)).8

The insider trading by Matta, Abraham, and Wesley provides

additional support for an inference of motive as to those

8 The 10(b) defendants argue that pre-Tellabs cases should not be relied upon. In noting that artificially inflating stock prices for acquisitions can support an inference of scienter, the Court of Appeals in ECA, 553 F.3d at 201 & n.6, cited pre-Tellabs cases approvingly. Pre-Tellabs cases are accorded the appropriate weight with the understanding that they predate the consideration of competing nonculpable inferences required by Tellabs.


53

defendants. A complaint that seeks to base scienter on a

corporate insider's sale of the insider’s own stock must show

“unusual” insider sales. See Scholastic Corp., 252 F.3d at 74;

Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995).

“Factors considered in determining whether insider trading

activity is unusual include the amount of profit from the sales,

the portion of stockholdings sold, the change in volume of

insider sales, and the number of insiders selling.” Scholastic,

252 F.3d at 74–75; see also City of Roseville Employees' Ret.

Sys. v. EnergySolutions, Inc., 814 F. Supp. 2d 395, 420

(S.D.N.Y. 2011).

With respect to Abraham, Matta, and Wesley, the allegations

of stock sales are very potent. During the Class Period, Abraham

sold 92% of his shares directly, while related parties sold 57%

of their shares indirectly, for a total of $31.5 million; Wesley

sold 83% of his shares for $3.4 million; and Matta sold 68% of

his shares for $18.1 million. The sheer magnitude of these sales

by three of the individual 10(b) defendants during the Class

Period, combined with the circumstances surrounding the sales,

including comScore’s admission of misconduct, strongly supports

an inference of scienter. See Stevelman v. Alias Research Inc.,

174 F.3d 79, 82, 85–86 (2d Cir. 1999) (sale of 40% of shares

indicative of motive).


54

The 10(b) defendants raise a number of unsuccessful

arguments in an effort to dilute the significance of the sales.

The 10(b) defendants argue that a portion of the sales by

Abraham and Matta were made pursuant to Rule 10b5-1 trading

plans. But “[w]hen executives enter into a trading plan during

the Class Period and the Complaint sufficiently alleges that the

purpose of the plan was to take advantage of an inflated stock

price, the plan provides no defense to scienter allegations.”

Employees' Ret. Sys. of Gov't of the Virgin Islands v. Blanford,

794 F.3d 297, 309 (2d Cir. 2015). While a small portion of the

sales were pursuant to trading plans entered into outside the

Class Period, the vast bulk of the sales were not made pursuant

to any Rule 10b5-1 trading plan or pursuant to trading plans

that were entered into at times that were plausibly designed to

take advantage of comScore’s allegedly inflated share price. SAC

¶¶ 178-82.

Abraham and Matta argue that the allegations fail to show

that their trades were out-of-line with their previous trading

practices, but the magnitude of their divestments during the

Class Period even when compared to previous periods is plausibly

unusual.

Wesley argues that he joined comScore as CFO during the

middle of the Class Period and that he sold his shares at the

first opportunity when restrictions on his stock awards expired,


55

which he contends creates an opposing nonculpable inference that

his sales were designed to diversify his portfolio. Considering

the allegations as a whole, it is more plausible that Wesley

joined the scheme and unloaded his shares at the first

opportunity while the stock price was artificially elevated.

The 10(b) defendants argue that what they label “in-kind”

sales (for example, sales to cover tax liabilities) should be

discounted from the analysis because only sales that result in

“take-home cash” are indicative of fraudulent intent. The

difference would not vitiate the inference of motive because the

take-home cash sales were substantial. Omitting trades pursuant

to trading plans entered into before the Class Period, and such

purported in-kind sales, Abraham took home in cash approximately

$12.5 million, Matta $8.5 million, and Wesley $2 million. See

Micheletto Decl., Ex. G.

Moreover, there is little principled reason to exclude in-

kind sales as a categorical matter. Money is fungible; in-kind

and take-home cash sales affect the seller’s bottom line

equally. See SLM Corp., 740 F. Supp. 2d at 558 n.6 (finding that

the explanation that sales “were necessary to pay the exercise

price of expiring options and associated taxes for stock sales”

was a disputed issue that could not be resolved on a motion to

dismiss).


56

However, the SAC fails to allege unusual trading on behalf

of Tarpey. Tarpey sold 22% of his shares for a value of $1.8

million, of which $650,000 worth was sold pursuant to Rule 10b5-

1 trading plans entered into before the Class Period. See Hendon

Decl., Ex. 6 (Tarpey Form 4s); SAC ¶¶ 176, 182. The trades were

not unusually timed. Tarpey argues that his retention of stock

raises a compelling nonculpable inference that he was not

complicit in the alleged fraud. While Tarpey presents a closer

case than the other individual 10(b) defendants, the culpable

inference of scienter that Tarpey was complicit despite his

failure to unload his stock before the scheme unraveled is at

least as powerful as any nonculpable inference.

Similarly, the culpable inference of scienter dwarfs any

nonculpable inference that the remaining individual 10(b)

defendants were not involved in the alleged fraud. The

individual 10(b) defendants argue that comScore’s disclosures

about nonmonetary transactions were exhaustive, which they

contend undercuts the inference of scienter. The individual

10(b) defendants exaggerate the content of the disclosures,

which were neither illuminating nor truthful.

The SAC thus plausibly alleges scienter against each

individual defendant. Because the SAC alleges scienter against

four key officers of comScore, it necessarily alleges scienter

against comScore itself. See Teamsters Local 445 Freight Div.


57

Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir.

2008) (“In most cases, the most straightforward way to raise [an

inference of scienter] for a corporate defendant will be to

plead it for an individual defendant.”); Arbitron, 741 F. Supp.

2d at 491 (“Because the plaintiffs have successfully pleaded

scienter as to . . . [the company’s] then-president, CEO, and

chairman, they have also pleaded corporate scienter as to [the

company].”); see also Orthofix, 89 F. Supp. 3d at 619–20.

Accordingly, the motions to dismiss the Section 10(b)

claims in Count I for failure to plead scienter are denied.

IV.

In Count II, the plaintiffs allege that the individual

10(b) defendants are liable under Section 20(a) of the Exchange

Act, which provides:

Every person who, directly, or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable . . . unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. 15 U.S.C. § 78t(a). “To establish a prima facie case of

control person liability, a plaintiff must show (1) a primary

violation by the controlled person, (2) control of the primary

violator by the defendant, and (3) that the defendant was, in

some meaningful sense, a culpable participant in the controlled


58

person's fraud.” ATSI, 493 F.3d at 108; see also In re New

Oriental Educ. & Tech. Grp. Sec. Litig., 988 F. Supp. 2d 406,

428–29 (S.D.N.Y. 2013). The 10(b) defendants’ only argument for

dismissal of the Section 20(a) claims is that the plaintiffs

have not adequately alleged a primary violation. Because this

argument is without merit, the motions to dismiss Count II are

denied.

V.

The Merger defendants have moved to dismiss the claims

pursuant to Section 14(a) of the Exchange Act in Counts III and

IV, and the comScore Merger defendants have moved to dismiss the

claims pursuant to Section 11 of the Securities Act in Count V.

Section 11(a) of the Securities Act provides that any

signatory to a registration statement, director of the issuer of

securities, or underwriter with respect to such securities,

among others, may be held liable to purchasers of registered

securities if the registration statement contains “an untrue

statement of a material fact or omitted to state a material fact

required to be stated therein or necessary to make the

statements therein not misleading.” 15 U.S.C. § 77k(a).

Section 11 imposes “a stringent standard of liability on

the parties who play a direct role in a registered offering.” In

re Flag Telecom Holdings, Ltd. Secs. Litig., 618 F. Supp. 2d

311, 321 (S.D.N.Y. 2009) (quoting Herman & MacLean v.


59

Huddleston, 459 U.S. 375, (1983)). To establish a prima facie

claim under Section 11, “[a] plaintiff need only plead a

material misstatement or omission in the registration

statement.” In re Flag Telecom Holdings, Ltd. Secs. Litig., 411

F. Supp. 2d 377, 382 (S.D.N.Y. 2006), abrogated on other

grounds, 574 F.3d 29 (2d Cir. 2009). Under Section 11,

“[l]iability against the issuer of a security is virtually

absolute, even for innocent misstatements,” while “[o]ther

defendants bear the burden of demonstrating due diligence.”

Herman & MacLean, 459 U.S. at 382; see also EnergySolutions, 814

F. Supp. 2d at 424.

Section 14(a) of the Exchange Act provides that “[i]t shall

be unlawful for any person . . . to solicit or permit the use of

his name to solicit any proxy” in violation of an SEC

regulation. 15 U.S.C. § 78n(a)(1). Rule 14a–9 in turn prohibits

both the inclusion of “any statement which, at the time and in

light of the circumstances under which it is made, is false or

misleading with respect to any material fact,” and the omission

of “any material fact necessary in order to make the statements

therein not false or misleading.” 17 C.F.R. § 240.14a–9(a).

“To state a claim under Section 14(a) and Rule 14a-9, a

plaintiff must allege that: ‘(1) a proxy statement contained a

material misrepresentation or omission, which (2) caused

plaintiffs injury, and (3) that the proxy solicitation itself,


60

rather than the particular defect in the solicitation materials,

was an essential link in the accomplishment of the

transaction.’” Bricklayers & Masons Local Union No. 5 Ohio

Pension Fund v. Transocean Ltd., 866 F. Supp. 2d 223, 238

(S.D.N.Y. 2012) (quoting Police and Fire Retirement System of

City of Detroit v. SafeNet, Inc., 645 F. Supp. 2d 210, 226

(S.D.N.Y. 2009)). While the Court of Appeals has not directly

addressed the issue, courts have generally concluded that

Section 14(a) allegations must identify with precision any

misleading statements or omitted material facts pursuant to the

PSLRA, 15 U.S.C. § 78u–4(b)(1). See In re Bank of Am. Corp.

Sec., Derivative, & Employee Ret. Income Sec. Act (ERISA)

Litig., 757 F. Supp. 2d 260, 286 (S.D.N.Y. 2010) (collecting

cases).

Neither Section 11 nor Section 14(a) requires pleading that

a defendant acted with intent to defraud. Dekalb Cty. Pension

Fund v. Transocean Ltd., 817 F.3d 393, 409 & n.95 (2d Cir.

2016), as amended (Apr. 29, 2016) (Section 14(a)); Rombach v.

Chang, 355 F.3d 164, 169 n.4 (2d Cir. 2004) (Section 11). While

loss causation is an element of a Section 14(a) claim, see

Witchko v. Schorsch, No. 15 CIV. 6043 (AKH), 2016 WL 3887289, at

*7 (S.D.N.Y. June 9, 2016), “[l]oss causation is not an element

of a Section 11 . . . claim and need not be pleaded to

sufficiently state a claim.” EnergySolutions, 814 F. Supp. 2d at


61

424 (collecting cases). Instead, Section 11 provides for a loss

causation affirmative defense to liability. Id.

A.

If Section 11 and Section 14(a) claims plead at most

negligence, they need only satisfy the notice pleading

requirements of Federal Rule of Civil Procedure 8(a). See

Litwin, 634 F.3d at 718 (Section 11); Wilson v. Great Am.

Indus., Inc., 855 F.2d 987, 995 (2d Cir. 1988) (Section 14(a));

Bank of Am. Corp., 757 F. Supp. 2d at 322 (Section 14(a)).

However, when claims under Sections 11 and 14(a) “are premised

on allegations of fraud,” they must also satisfy Rule 9(b) of

the Federal Rules of Civil Procedure. Rombach, 355 F.3d at 171

(Section 11); In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d

595, 636 (S.D.N.Y. 2005) (“The reasoning of [Rombach], that

extends Rule 9(b) particularity requirements to Section 11

claims, applies with equal force to claims brought pursuant to

Section 14(a).”).

Relying on Rombach, the Merger defendants argue that all of

the claims must sound in fraud because some of the claims

against some of the defendants sound in fraud. The Merger

defendants misread Rombach. Unlike the plaintiffs in Rombach ---

whose Section 11 claims incorporated by reference the

allegations supporting their Section 10(b) fraud claims --- the

plaintiffs here went beyond “nominal efforts” to distinguish


62

their fraud allegations from their strict liability and

negligence allegations under Section 11 and Section 14(a).

Rombach, 355 F.3d at 171, 175 (citation omitted).

The SAC specifies that the Section 14(a) and Section 11

claims “are based solely on negligence or strict liability” and

“disclaims any allegations of fraud, scienter, or recklessness

in these non-fraud claims . . . .” SAC ¶ 528. “On their own,

such disclaimers are insufficient to subject a complaint to Rule

8, because ‘[p]laintiffs cannot evade the Rule 9(b) strictures

by summarily disclaiming any reliance on a theory of fraud or

recklessness.’” EnergySolutions, 814 F. Supp. 2d at 424 (quoting

JP Morgan Chase, 363 F. Supp. 2d at 635). However, the SAC is

segregated into two parts, the first for the allegations

supporting Counts I and II, which sound in fraud, and the second

for the allegations supporting Counts III, IV, and V, which

plead at most negligence. Counts III, IV, and V are only pleaded

by plaintiff Huff. Plaintiff Huff is allowed to “plead claims in

the alternative” and the careful structure of the SAC “draw[s] a

clear distinction between [the at most] negligence and fraud

claims.” In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611, 632

(S.D.N.Y. 2007); accord In re Wachovia Equity Sec. Litig., 753

F. Supp. 2d 326, 374 (S.D.N.Y. 2011). In similar circumstances,

courts have consistently held that Section 11 and Section 14(a)

are subject to notice pleading where, as here, the division


63

between the claims is clear. E.g., In re Jumei Int'l Holding

Ltd. Sec. Litig., No. 14-CV-9826, 2017 WL 95176, at *3 (S.D.N.Y.

Jan. 10, 2017) (Section 11); EnergySolutions, 814 F. Supp. 2d at

424 (Section 11); Bank of Am. Corp., 757 F. Supp. 2d at 321–22

(Section 14(a)).

The Rentrak defendants’ characterization of the SAC as

telling a “single fraud story,” Rentrak Mem. Op. at 8, is

without merit. Part of the rationale animating Rombach, 355 F.3d

at 171, was the salutary purposes underlying Federal of Civil

Procedure Rule 9: claims that sound in fraud, by their nature,

can harm a defendant’s reputation and may be used as strike

suits. Those concerns are not present here in light of the

different theories underlying the fraud and the (at most)

negligence claims, and they are not remotely present for the

majority of the Merger defendants, who are not implicated by any

fraud claims. In particular, a fair reading of the SAC does not

reveal any allegations that could lead to an inference that the

Rentrak defendants were complicit in the fraud alleged against

the 10(b) defendants.

Nevertheless, the Merger defendants argue that the division

of the SAC is irrelevant because the allegations supporting the

Section 11 and Section 14(a) claims are couched in the language

of fraud because they refer to the allegedly problematic proxy

solicitation and Registration Statement as “materially false and


64

misleading and omit[ing] material facts.” See, e.g., SAC ¶ 533.

The majority of well-reasoned cases have rightly rejected this

argument. See Bank of Am. Corp., 757 F. Supp. 2d at 321 (Section

14(a)); Refco, 503 F. Supp. 2d at 632 (Section 11). Plaintiff

Huff’s allegations simply track the language of Section 11, see

15 U.S.C. § 77k(a), and Rule 14a-9, see 17 C.F.R. § 240.14a–

9(a); they do not sound in fraud. To hold that bare recitations

of the elements of the causes of action triggered Rule 9(b)

would be contrary to the holding of the Court of Appeals in

Rombach, 355 F.3d at 178, that claims under Section 11 need not

sound in fraud, and the recent statement by the Court of Appeals

in Dekalb that “[l]iability can be imposed [under Section 14(a)]

for negligently drafting a proxy statement.” 817 F.3d at 409 &

n.95 (quoting Wilson, 855 F.2d at 995) (collecting cases). A

contrary rule also “would create a perverse incentive to file

separate actions.” Lewy v. SkyPeople Fruit Juice, Inc., No. 11

CIV. 2700 (PKC), 2012 WL 3957916, at *8 (S.D.N.Y. Sept. 10,

2012).

Citing Bond Opportunity Fund v. Unilab Corp., No. 99 CIV.

11074 (JSM), 2003 WL 21058251, at *3 (S.D.N.Y. May 9, 2003),

aff’d, 87 F. App'x 772 (2d Cir. 2004) (summary order), the

Merger defendants argue that claims of negligence pursuant to

Section 14(a) are subject to the elevated pleading standard of

the PSLRA, 15 U.S.C. § 78u–4(b)(2), meaning that plaintiff Huff


65

must plead a strong inference of negligence. 15 U.S.C. § 78u–

4(b)(2) provides: “[I]n any private action arising under this

chapter in which the plaintiff may recover money damages only on

proof that the defendant acted with a particular state of mind,

the complaint shall, . . . state with particularity facts giving

rise to a strong inference that the defendant acted with the

required state of mind.”

The better reasoned cases have followed the decision of the

Court of Appeals for the Seventh Circuit in Beck v. Dobrowski,

559 F.3d 680 (7th Cir. 2009) (Posner, J.), which held that the

elevated pleading standard does not apply to Section 14(a)

claims that sound in negligence because “negligence is not a

state of mind; it is a failure, whether conscious or even

unavoidable (by the particular defendant, who may be below

average in his ability to exercise due care), to come up to the

specified standard of care.”9 Id. at 682; accord Transocean, 866

F. Supp. 2d at 240; Bank of Am. Corp., 757 F. Supp. 2d at 321.

The Court of Appeals for the Second Circuit recently cited

Beck’s articulation of the law with approval in Dekalb, 817 F.3d

at 408 n.90. The articulation is consistent with what it takes

9 Section 11 imposes a standard of strict liability on issuers and the signatories of registration statements. See Panther Partners Inc. v. Ikanos Commc'ns, Inc., 681 F.3d 114, 120 (2d Cir. 2012). There can thus be no argument by the comScore Merger defendants that the PSLRA imposes a heightened pleading standard on Section 11 claims against issuers and signatories --- there is nothing to heighten.


66

to plead a Section 14(a) claim: “Under Rule 14a-9, plaintiffs

need not demonstrate that the omissions and misrepresentations

resulted from knowing conduct undertaken by the director

defendants with an intent to deceive. Liability can be imposed

for negligently drafting a proxy statement.” Wilson, 855 F.2d at

995 (citation omitted); accord Dekalb, 817 F.3d at 408 & n.90.

Accordingly, plaintiff Huff’s Section 11 and 14(a) claims

in Counts III, IV, and V need only meet Rule 8(a)’s notice

pleading requirement.

B.

The comScore Merger defendants have moved to dismiss the

Section 14(a) claims in Count III and the Section 11 claims in

Count V. Plaintiff Huff alleges that the Registration Statement

and proxy solicitation materials related to the Merger contained

a variety of false and misleading statements substantially

identical to or of the same nature as those discussed in

connection with the 10(b) claims, namely, related to comScore’s

reported revenues and revenue related metrics, which were

inflated by nonmonetary revenue.10 SAC ¶¶ 566-613.

The comScore Merger defendants do not offer a basis to

distinguish the alleged misstatements and omissions in Counts

10 Plaintiff Huff has clarified that his omission claims related to the Grant Thornton Report are directed solely against the Rentrak defendants. See Dkt. 204 (Pls.’ 10(b) Mem. Op.) at 73 n.21.


67

III and V from the substantially identical misrepresentations

and omissions already addressed in connection with Counts I and

II. The SAC pleads that there were actionable misrepresentations

and omissions in the proxy solicitation and the Registration

Statement. See EnergySolutions, 814 F. Supp. at 425 (“Under Rule

8, all allegations that survive Rule 9(b) necessarily survive as

well.”).

The comScore Merger defendants principally argue that the

SAC fails to plead negligence.

That argument is inapplicable to Count V because “Section

11 imposes strict liability on issuers and signatories, . . .

‘[i]n case any part of the registration statement, when such

part became effective, contained an untrue statement of a

material fact or omitted to state a material fact required to be

stated therein or necessary to make the statements therein not

misleading.’” Panther Partners Inc. v. Ikanos Commc'ns, Inc.,

681 F.3d 114, 120 (2d Cir. 2012) (quoting 15 U.S.C. § 77k(a)).

Because plaintiff Huff has pleaded actionable misrepresentations

in the Registration Statement, he has pleaded Section 11 claims

against the comScore Merger defendants.

With respect to the Section 14(a) claims in Count III, “As

a matter of law, the preparation of a proxy statement by

corporate insiders containing materially false or misleading

statements or omitting a material fact is sufficient to satisfy


68

the . . . negligence standard.” Wilson, 855 F.2d at 995; see

also Brown v. Brewer, No. CV06-3731 (GHK), 2010 WL 2472182, at

*24-25 (C.D. Cal. June 17, 2010). The allegations are sufficient

to meet that low bar.

Accordingly, the motion by the comScore Merger defendants

to dismiss Counts III and V is denied.

C.

The Rentrak defendants have moved to dismiss the Section

14(a) claims in Count IV for failure to plead a material

misstatement or omission. Plaintiff Huff’s claims relate to the

red flags identified in the Grant Thornton Report to the effect

that comScore’s accounting for nonmonetary transactions “may

have provided opportunities for [comScore] Management to

‘manage’ revenues to meet targets.” SAC ¶ 557. Plaintiff Huff

claims that the Rentrak defendants breached a duty to Rentrak’s

shareholders by failing to disclose (in some form) the red flags

in their proxy solicitation materials. Plaintiff Huff also

faults the Rentrak defendants for negligently preparing proxy

solicitation materials.

A “proxy statement should honestly, openly and candidly

state all the material facts, making no concealment of the

purposes for the proposals it advocates.” Mendell v. Greenberg,

927 F.2d 667, 670 (2d Cir.), amended, 938 F.2d 1528 (2d Cir.

1990). Section 14(a) is satisfied “[o]nly when the proxy


69

statement fully and fairly furnishes all the objective material

facts as to enable a reasonably prudent stockholder to make an

informed investment decision is the federal purpose in the

securities laws served.” Id. at 674; see also Bank of Am. Corp.,

757 F. Supp. 2d at 290 (“Even ‘indefinite and unverifiable’

terms, such as observations that an offer was ‘fair’ or of a

‘high’ value, can be actionable under Section 14(a) and Rule

14a–9, because they are based on ‘provable facts.’” (quoting

Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1093–94,

(1991))).

“A[n] omission is actionable under federal securities laws

only when the [defendant] is subject to a duty to disclose the

omitted facts.” In re Time Warner Inc. Sec. Litig., 9 F.3d 259,

267 (2d Cir. 1993). “[O]nce a company speaks on an issue or

topic, there is a duty to tell the whole truth.” Meyer v.

Jinkosolar Holdings Co., 761 F.3d 245, 250 (2d Cir. 2014). “[A]n

entirely truthful statement may provide a basis for liability if

material omissions related to the content of the statement make

it . . . materially misleading.” In re Bristol Myers Squibb Co.

Sec. Litig., 586 F. Supp. 2d 148, 160 (S.D.N.Y. 2008).

Plaintiff Huff primarily challenges the following

representation in the Joint Proxy as false and misleading:

On September 8, 2015, the Rentrak Board met to review the status of the discussions with comScore, with a focus on results of the due diligence process. Mr.


70

Chemerow reviewed materials that had been prepared by Grant Thornton regarding the results of Grant Thornton’s accounting due diligence.

SAC ¶¶ 579-80. Plaintiff Huff plausibly claims that the

Rentrak defendants did not fairly and fully apprise investors of

the risks associated with the Merger, as required under Section

14(a). The statement, while factually correct, plausibly does

not go far enough to satisfy Rentrak’s duty of fair and full

disclosure. The statement creates the false impression that

Grant Thornton identified no material concerns in their review

of comScore’s financial data. The representation omits

information suggesting that comScore’s revenue numbers could be

inflated, and the reason for the inflation, which was plausibly

grounded in provable facts: the financial information reviewed

by Grant Thornton. That undisclosed information plausibly would

have been material to a reasonable investor in deciding how to

vote on the Merger. The Rentrak defendants were plausibly under

a duty to disclose more under Section 14(a).

The Rentrak defendants argue that the Grant Thornton Report

did not specifically alert them to the fact that comScore’s

revenue numbers were overstated, and that there was thus no

additional risk factor to disclose. Read in the light most

favorable to plaintiff Huff, the Report communicated the risk

that, based on Grant Thornton’s financial due diligence,

comScore’s revenue numbers could be overstated because


71

management was manipulating revenues to meet market

expectations.

The Rentrak defendants also argue that they were under no

duty to disclose the Grant Thornton Report’s observations. The

Rentrak defendants point to the Report’s “may” language, arguing

that it insulates them from liability because the observations

were not expressed in the language of certainty. Few disclosed

risk factors are expressed in such language. The Rentrak

defendants were “certainly require[d]” to disclose “information

that would permit an investor to appreciate the risk[s]”

associated with the Merger. In re Indep. Energy Holdings PLC

Sec. Litig., 154 F. Supp. 2d 741, 760 (S.D.N.Y. 2001). This was

plausibly one such risk.

The Rentrak defendants argue that a reasonable investor

would not have found the Grant Thornton Report’s red flags

material.

“An omitted fact is material if there is a substantial

likelihood that a reasonable shareholder would consider it

important in deciding how to vote.” TSC Indus., Inc. v.

Northway, Inc., 426 U.S. 438, 449 (1976). Such a determination

“requires delicate assessments of the inferences a ‘reasonable

shareholder’ would draw from a given set of facts and the

significance of those inferences to him, and these assessments

are peculiarly ones for the trier of fact.” Id. at 450. Because


72

materiality is a mixed question of law and fact, the Court of

Appeals had indicated that its resolution often implicates a

jury question. Mendell, 927 F.2d at 673; see also Bank of Am.

Corp., 757 F. Supp. 2d at 290.

In this case, it is plausible that a reasonable investor

would find it material that an accounting firm, upon reviewing

comScore’s financial information, had identified concrete

reasons to believe that comScore’s revenues could be overstated.

The Rentrak defendants also argue that the Grant Thornton

Report’s red flags were not material because the market already

knew that there could be issues with comScore’s accounting for

nonmonetary transaction based on the questions raised by the

Wall Street Journal and other media outlets. This raises a so-

called “truth-on-the-market defense” that “a misrepresentation

is immaterial if the information is already known to the market

because the misrepresentation cannot then defraud the market.”

Ganino, 228 F.3d at 167. To be successful, “the corrective

information must be conveyed to the public ‘with a degree of

intensity and credibility sufficient to counter-balance

effectively any misleading information created by’ the alleged

misstatements.” Id. (citation and internal quotation marks

omitted). The Court of Appeals has instructed that “[t]he truth-

on-the-market defense is intensely fact-specific and is rarely

an appropriate basis for dismissing a § 10(b) complaint for


73

failure to plead materiality.” Id. While the truth-on-the-market

defense typically arises in the context of Section 10(b) claims,

there is no reason to craft a different rule for a claim based

on Section 14(a). Bank of Am. Corp., 757 F. Supp. 2d at 301-03;

see also Kronfeld v. Trans World Airlines, Inc., 832 F.2d 726,

736 (2d Cir. 1987) (“There are serious limitations on a

corporation's ability to charge its stockholders with knowledge

of information omitted from a document such as a proxy statement

or prospectus on the basis that the information is public

knowledge and otherwise available to them.”).

This is not an appropriate case for a “truth-on-the-market”

defense. The Joint Proxy instructed: “Stockholders of comScore

and shareholders of Rentrak should rely only on the information

contained in this joint proxy statement/prospectus and in the

documents that comScore and Rentrak have incorporated by

reference into this joint proxy statement/prospectus.” Browne

Decl., Ex. 4 at 136. Because Rentrak “itself warned investors

not to rely on the media, it would be unreasonable for a

shareholder to consider the media pronouncements to be part of

the relevant mix of information.” S.E.C. v. Bank of Am. Corp.,

677 F. Supp. 2d 717, 719 (S.D.N.Y. 2010); accord In re Facebook,

Inc. IPO Sec. & Derivative Litig., 986 F. Supp. 2d 487, 522

(S.D.N.Y. 2013).


74

Moreover, regardless of the instruction, the force of any

corrective information had been undermined by comScore’s

vigorous defense of its accounting practices to analysts,

investors, and the SEC. The fact that the Rentrak defendants had

exclusive access to the Grant Thornton Report --- which was

based on comScore’s financial data --- distinguishes this case

from cases like Bettis v. Aixtron SE, No. 16 CIV. 00025 (CM),

2016 WL 7468194, at *12-13 (S.D.N.Y. Dec. 20, 2016), where

investors and corporate insiders alike had equal access to the

same public information that was allegedly omitted.

Finally, the Rentrak defendants contend that the

allegations do not plausibly allege negligence, but the

allegations are sufficient to meet the low bar for pleading

negligence in the Section 14(a) context. See Wilson, 855 F.2d at

995. While the Rentrak defendants point to a number of efforts

they took to assure themselves that comScore’s financials were

sound, those efforts raise issues of fact that cannot be

resolved at the pleading stage.

Accordingly, the motion by the Rentrak defendants to

dismiss Count IV is denied.

CONCLUSION

The Court has considered all of the arguments raised by the

parties. To the extent not specifically addressed, the arguments

are either moot or without merit. For the foregoing reasons, the


75

motions to dismiss are denied. The Clerk is directed to close

all pending motions.

SO ORDERED. Dated: New York, New York July 28, 2017 ____________/s/________________ John G. Koeltl United States District Judge


fresno county employees retirement association, et al. v....

Documents